The Israeli bond market shakeout

Following the crash at the turn of the year, NYC developers looking to raise funds on the Tel Aviv Stock Exchange face a more selective market

Oct.October 01, 2019 11:00 AM

From left: Gary Barnett, David Lichtenstein, Larry Silverstein and Boaz Gilad with the Tel Aviv Stock Exchange

When Silverstein Properties announced plans to raise roughly $50 million on the Tel Aviv Stock Exchange in early February, many eyebrows were raised.

Israeli bonds issued by New York developers and other American companies had been in free fall since November 2018, when Boaz Gilad’s Brookland Capital suspended trading and announced that it would miss an $11 million principal payment due before the new year.

Similar disclosures from other firms fueled the uncertainty, and the Tel Bond-Global index — mainly composed of U.S.-issued real estate debt — lost 20 percent of its value in just two months.

Silverstein’s expansion of its Series A bonds turned out to be a lone bright spot in a panicked market. The offering, handled by Tel Aviv-based underwriter Leader Capital Markets, attracted $130 million in demand from institutional investors, nearly three times as much as what was available.

“The market was shut down and closed for everyone — except Silverstein Properties,” said one executive at Leader Capital, who asked not to be named.

With U.S. bonds trending upward again in Tel Aviv, the World Trade Center developer came back for more this September, issuing a new bond series valued at $65 million.

“We have strong relationships with Israeli institutions, which we’ve cultivated for over a decade,” Silverstein’s president, Tal Kerret, told The Real Deal. “We issue bonds when it makes sense for our business needs. How the market is doing overall doesn’t make a big difference for us.”

This time around, though, the company was less of an outlier. Within the span of about a week, two more New York developers — David Lichtenstein’s Lightstone Group and Joel Gluck’s Spencer Equity — also disclosed plans to issue new bonds in Tel Aviv.

A growing number of U.S. developers are flocking to Israel in search of favorable financing as banks continue to pull back from construction deals and the once-almighty EB-5 visa program loses luster. From big national players to lesser-known outer-borough sponsors, American real estate firms have raised hundreds of millions of dollars so far this year.

But the latest offerings come with an added dose of pragmatism, as bondholders become more attuned to the many challenges in such major real estate markets as New York. Spencer Equity, for one, canceled its latest bond series amid investor concerns about one of the firm’s properties in Brooklyn.

“I expect that future issuances will go through additional scrutiny both from ratings agencies and bond buyers,” said Yossi “Joe” Berko, of the New York-based commercial brokerage Berko & Associates, which has worked closely with underwriters in Israel. “The market will be a bit more selective.”

Highs and lows

Though last year’s mass selloff began with concerns over individual companies, it soon evolved into more widespread skepticism over the monitoring and compliance of U.S. bond issuers.

Larger economic factors certainly didn’t help. Global stock markets saw major declines last year, while U.S. interest rate hikes — expected to drive up cap rates and push down property values — further dampened investor appetite (the Federal Reserve has since cut rates twice in the face of growing concerns about a recession).

“It was sort of a perfect storm,” Berko said of the late 2018 market malaise, noting that the first signs of the turmoil began earlier in the year, before the wave of negative news hit.

“A lot of hedge funds were looking to sell all at the same time, reaching maturity on their particular investments,” he said.

Developers, meanwhile, tried to make the most out of the market’s rough patch. Several New York firms, including Gary Barnett’s Extell Development and Michael Shah’s Delshah Capital, executed bond buybacks while prices were low.

Shah, who has issued three bond series in Tel Aviv to date, said his firm’s “relationship with its investors was largely unaffected, as many understood this was a market-wide issue and not an issuer specific problem.”

Delshah Capital’s worst-performing series hit a low of 65 cents on the dollar in mid-January, but it has since recovered to above 90, while most other New York-based firms have seen their bond prices follow similar trajectories.

Even Yoel Goldman’s All Year Management — which contributed to the Tel Aviv market crisis when it disclosed the “accidental” transfer of $3.7 million into Goldman’s personal accounts — has largely bounced back from the depths of the crash. All Year’s Series B bonds were trading at just under 90 cents on the dollar in mid-September after falling to a low of 45 in February.

And Extell, whose bonds were among the worst performing for much of 2017 and 2018, thanks to the firm’s own troubles with Israeli investors, appears to have shaken off those concerns. Extell’s bonds are now trading above par for the first time in years, a significant improvement from the 75 cents they were trading at two years ago.

At the same time, other large Tel Aviv-listed firms from New York have managed to dodge major losses — and many are now trading at higher prices than they were a year ago.

Lightstone’s bonds, for instance, have traded above par for most of the past year, with a slight downward blip in late December, and are now close to 110 cents on the dollar. The firm declined to comment for this article.

Meanwhile, Silverstein’s new bonds were trading slightly above par as of late September. Lightstone’s bonds had not yet begun trading at press time.

“Bondholders are smart people, and what they value is stability,” Silverstein’s Kerret said. “With economic conditions the way they are now, I expect we’ll continue to see a flight to quality.”

But the market-wide rebound isn’t a party for all. The bonds for many New York-based firms are still trading at a discount from their pre-crash levels.

“There’s more of a filtering process now,” the unnamed executive at Leader Capital said. “Unlike in the past, where everyone would come and raise money, people are doing deeper analysis for the price of their bonds and not just looking at the ratings.”

Tel Aviv bonds that tie

All told, the Tel Bond-Global now has a market cap of $4.8 billion — up from $4.1 billion two years ago but still down from its peak of $5.7 billion right before the crash.

Among the benefits that have drawn American firms to Tel Aviv, two stand out as the most significant in 2019’s fourth quarter: lower U.S. interest rates and the option to issue unsecured corporate bonds, which means the bondholders can’t foreclose on a property.

About 75 percent of the bond series issued by North American firms are not secured by loans on specific properties, according to an analysis of Israeli public records by Leader Capital.

But a growing number of New York developers are offering bonds backed by first mortgages — a move that gives bondholders more certainty in the case of default.

That will further weed out some firms, sources say.

For example, before Spencer Equity canceled its latest offering last month, it had been planning to secure the bonds with its Spire Lofts rental project at 163 North 6th Street in Williamsburg.

Appraisal reports disclosed on the Tel Aviv Stock Exchange note that the developer has failed to obtain a certificate of occupancy due to excess floor space, and the project’s second phase has been stalled for years.

Spencer Equity did not respond to requests for comment.

Prior to the crash, the company’s bonds were among the market’s highest valued. But its founder, Gluck, has faced increased scrutiny from investors as a result of his frequent partnerships with Goldman’s All Year, which has a 30 percent stake in Spire Lofts.

Sources say Israeli investors are increasingly calling for bonds to be secured by real property as a safeguard.

When Dallas-based Westdale Asset Management made its Tel Aviv debut this May, for instance, its $140 million bond issuance was secured by three assets in Texas.

“Unsecured is the most desirable product for U.S. issuers,” one industry source said on the condition of anonymity. “For that, you need to come strong.”

Though issuing secured bonds would appear to negate one of the main benefits of going to Israel in the first place, Berko said there’s a “strategic advantage” of establishing a foothold in the Israeli market.

“You get to know the market, and, more importantly, the market gets to know you,” he noted

Market aftershocks

With market-wide problems now largely in the rearview, some U.S. developers are facing difficulties closer to home.

Joel Wiener’s Pinnacle Group, which trades under the name Zarasai in Tel Aviv, has seen its Series C bonds hover around 90 cents on the dollar since June, a discount from the firm’s pre-crash value of above 100.

That decline can largely be attributed to recent challenges in New York’s real estate market, some say.

In an opinion piece titled “Why I opened a short position on Zarasai’s bonds,” published on the Israeli business news site Calcalist in early July, financial adviser Ori Eizenberg pointed to New York’s new rent laws, which restrict rent increases as well as condo conversions. Both are key to Pinnacle’s business strategy, he argued.

The article provoked a strong reaction from Wiener’s company on the Tel Aviv Stock Exchange’s website, accusing Eizenberg of inaccuracies, misrepresentations and a financial incentive to smear Wiener’s company.

A Pinnacle spokesperson told TRD that “as an issuer of publicly traded instruments, the company refers to its publicly filed documents.”

Another straggler in the recent market recovery has been Barry Sternlicht’s Starwood Capital Group, which was hit with a class-action lawsuit from Israeli bondholders in April over the firm’s alleged failure to disclose risks in its mall portfolio. Starwood’s bonds have been left behind by the overall market recovery and continued to trade at a dismal 40 cents on the dollar in late September.

A Starwood spokesperson declined to comment, citing the pending litigation.

Despite the recent turmoil and issues facing specific borrowers, the draw of the Israeli bond market remains very much the same for U.S. developers, according to several industry players.

“The demand in Israel is very, very strong,” Berko said. “It’s a solid savers’ economy, where about $1.5 billion in fresh capital is being infused into the economy on a monthly basis.”

But the Tel Aviv Stock Exchange also remains a small pond with several big fish from outside waters.

“Israel, geographically, simply does not present enough investment opportunities,” Berko added. “So, you’ve got the big institutional guys sitting there, and then when opportunities from the U.S. come in — where they can get a significant premium over similar companies in Israel — they look at them as a great investment.”